Chichi Corporation had the following equity account balances at December 31, 2009: Preference share capital Share premium-preference
P 1,800,000 90,000
Ordinary share capital
5,150,000
Share premium-ordinary
3,500,000
Retained earnings
4,000,000
Net unrealized loss on available for sale securities
245,000
Treasury share-ordinary
270,000
Chichi’s preference and ordinary shares are traded on the over-the-counter market. At December 31, 2009, Chichi had 100,000 authorized shares and 3,000,000, no par, authorized ordinary shares with a stated value of P5 per share Transactions during 2010 and other information relating to the equity account were as follows: a) On January 10, 2010, Chichi formally retired all the 30,000 treasury shares and had them revert to unissued basis. The treasury shares had been acquired on January 20, 2009. The shares were originally issued at P10 per share. b) Chichi owned 10,000 ordinary shares of Benny Inc. purchased in 2009 for P 750,000. The Benny shares were included in Chichi’s trading securities portfolio. On February 15, 2010, Chichi declared a dividend in kind of one share of Benny for every hundred ordinary of Chichi held by shareholders of record on February 28, 2010. The dividend in kind was distributed on March 12, 2010. c) On April 1, 2010, 1,000,000 shares right were issued to the ordinary shareholders permitting the purchase of new one ordinary share in exchange for four rights and P11 cash. On April price of Chichi’s ordinary share was P13 per share. Chichi’s issued new shares to settle the transaction. The remaining 160,000 rights were not exercised and thus expired. d) On January 1, 2007, Chichi granted share options to employees for the purchase of 100,000 ordinary shares of the company at P8 per share which was also the market price. The options are exercisable within a three-year period beginning January 1, 2009. On July 1, 2010, employees exercised 80,000 options for P8 per share. On July 1,
2010, the market price of Chichi’s ordinary share was P8 per share. Chichi used new shares to settle the transaction. e) On December 12, 2010, Chichi declared the yearly cash dividend on preference shares, payable on January 14 2011, to shareholders of record on December 31, 2010. f)
After year-end adjustment, the net unrealized loss on available for sale securities account had a debit balance of P135,000 at December 31, 2010.
g) On January 15, 2011, before the accounting records were closed for 2010, Chichi became aware that rent income for the year ended December 31, 2009 was overstated by P500,000. The after tax-effect on the 2009 profit was P275,000. The appropriate correcting entry was recorded the same day. h) After correcting the rent income, profit was P2,600,000.
Questions: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Ordinary Share Capital a. P6,330,000 b. P6,450,000
c. P7,950,000 d. P8,250,000
2. Share premium – ordinary a. P5,000,000 b. P4,880,000
c. P3,380,000 d. P4,970,000
3. Total contributed capital a. P13,220,000 b. P8,250,000
c. P18,615,000 d. P16,725,000
4. Retained earnings a. P5,275,000 b. P5,445,000
c. P5,170,000 d. P5,395,000
5. Total equity a. P18,615,000 b. P18,255,000
c. P18,480,000 d. 18,530,000
Answers: 1. B 2. B
3. A 4. D 5. C
EXPLANATION:
a) The shares must have been issued originally. This requisite distinguished treasury shares from unissued shares. Treasury shares can legally reissued at a discount without any discount liability while unissued shares must be issued at least at par or stated value. In other respects, treasury shares and issued shares are the same. Both are equity rather than asset. The retirement results in a loss, meaning the cost of the treasury shares exceeds the par value, such loss is debited to the following in the order given: 1. Additional paid in capital or share premium to the extent of the credit when the shares were issued or additional paid in capital or share premium from original issuance. 2. Additional paid in capital or share premium from treasury shares. 3. Retained earnings.
b)
Treasury share
P270,000
Ordinary share(30,000xP5)
150,000
Share Premium-O/S
P120,000
3,000,000/100=30,000. The acquisition of shares of another entity is not a treasury but an Investment. To qualify as a Treasury a share must be the entity’s own share, originally issued and can be reacquired but not cancelled. 30,000-10,000 = 20,000 out. Shs x P5 stated value = P100,000 Dividends Payable
c) For the issuance and expiration of the rights only a memorandum entry is prepared. The journal entry is prepared when there is an exercise of the rights. No entry is required when the share warrants are issued to shareholders because these warrants are issued usually without consideration. The entity only needs to make a memorandum entry to indicate the number of rights issued to shareholders and the number of shares that can be purchased through the exercise of the rights. If the rights are exercised, a memorandum is made for the decreased in the number of shares claimable through the exercise of rights. 840,000/4=210,000 210,000 x P11=2,310,000 Cash 210,000 x P5=P1,050,000 Ordinary share 210,000 x P6=P1,260,000 Share premium-OS d) For the grant of rights only memorandum is prepared and for the exercise of the rights a journal entry is prepared. Exercised share 80,000 x P8=P640,000 Cash
80,000 x P5=P400,000 Ordinary share 80,000 x P3=P240,000 Share Premium-OS e)
(100,000 shares x 100 par = 10,000,000 x 10% = 1,000,000) Retained Earnings 1,000,000 Dividends Payable 1,000,000
f)
Unrealized loss – AFS Available for sale
135,000 135,000
The unrealized gain or loss on AFS is recognized And deduct in equity and classified as component Other comprehensive income. It is treated as a permanent account which is carry forward from one accounting period to the next.
g) Overstatement of Rent Income P500,000 Profit 270,000 Income Tax Payable P 225,000
Rent Income Retained Earnings
500,000 275,000
Income Tax Payable h)
225,000
* Profit/Loss Summary Retained Earnings
2,600,000
300,000
Retained Earnings Retained Earnings-app.
2,600,000
300,000
Solutions: Ordinary Share
Share premium-
Preference Share
Share Premium-
Retained Earnings
Treasury Shares
Net Loss on AFS
O/S
P/S
Beg. Bal
5,150,000
3,500,000
a)
-150,000
-120,000
1,200,000
90,000
b)
4,000,000
270,000
-270,000
(270,000)
-100,000
c)
1,050,000
1,260,000
d)
400,000
240,000
e)
(1,000,00 0)
f)
-110,000
g)
275,000
h)
2,600,000 P 5,505,00 0
TOTA L
245,000
P 6,450,000
P 4,880,000
P 1,800,000
Contributed Capital: Ordinary Share Share premium-O/S
P 135,000
Total Equity
P 18, 480,000
Retained earnings
P5,505,000
4,880,000
Share Premium-P/S
P
90,000 Total Contributed Capital 13,220,000
P
Total Equity: Total Contributed Capital P 13,220,000 Retained Earnings 5,395,000
Net Loss on AFS 135, 000
-0-
P 6,450,000
Preference Share 1,800,000
Treasury Shares
P 90,000
-110,000
-0-
Net Loss on AFS (245,000-135,000) (110,000) Retained Earnings-adjusted P 5,395,000
